Let's Get Frank

Ahh… the smell of fear… election season is upon us and while I don’t typically weigh in on issues of pure politics, I’d like to take a moment and remind any voters who should happen to reside in Massachusetts’s 4th congressional district how much of an embarrassing fraud your current congressional representative is.

Barney Frank as chairman of the House Financial Services Committee and throughout his thirty year long career has always been a firm advocate and champion of the role Fannie Mae and Freddie Mac play in our housing markets.

Even in early 2008 when the epic housing crescendo was obvious to most observers, Barney Frank was pushing ever harder for lower lending standards and higher loan limits for these two colossal and massively fraudulent government sponsored enterprises.

In March of that year I took to writing a letter to Rep. Frank protesting his move to relax lending standards and increase loan limits arguing that if congress enacted such changes it would likely aggravate an already troubled situation for housing.

Further, I closed my comment to him with the following statement:

“Although Congressional and Executive mandate apparently provide a dynamic and flexible environment for generating regulatory statute that suits the perceived whim of constituents (particularly in an election year), the “law of unintended consequences” remains largely rigid as it appears now quite clear that the main focus of Congress and the Administration later this year will be the federal bailout of Fannie Mae and Freddie Mac.”

To this Rep. Barney Frank responded as follows:

“Our biggest difference of opinion is your assumption that raising the limit will expose Fannie Mae and Freddie Mac to greater danger. I think the opposite is the case. I think that their ability to participate at the higher levels will add to their financial security.

I am glad to have your prediction that we will soon be engaged in a "federal bailout of Fannie Mae and Freddie Mac," because I disagree and this will give us some measure of the accuracy of our respective predictions in this regard.”

Not only did Rep. Frank NOT see the danger of the proposals he was pushing, he actually saw the changes as bringing the exact opposite... greater security.

Further, as is typical with Rep. Frank, he couldn’t simply disagree, he had to issue a challenge stating that he was glad I had made the prediction of the collapse of Fannie and Freddie because it would “give us a measure of our respective predictions in this regard”.

As you now know, my prediction was wholly more accurate that Rep. Barney Frank’s as in the summer of 2008 both Fannie and Freddie did, in fact, collapse being put under conservatorship by the federal government at the (yet to be fully determined) total cost of multiple hundreds of billions of dollars of current and future taxpayer money.

Of course, I sent a follow-up letter to Rep. Frank and after two years have yet to hear back.

You see, Barney Frank is a fraud.

He simply found a fortunate position in life in whereby the office he holds projects a measure of esteem, confidence and high honor that by mere association he too appears to reflect, yet like a chameleon it is only a ruse.

At best Frank is simply a pristine example of the warped sociopaths that inhabit Washington DC… rude, surly and vulgar, full of a sense of superiority, hungry for power, callous to the law of unintended consequences and ignorant on virtually all matters of any importance.

One can only hope that somehow the voters of the 4th district can find it in themselves to pull the lever for another candidate or, at the very least, not pull a lever at all.

Ticking Prime Bomb!: Fannie Mae Monthly Summary September 2009

Decades from now the summer of 2008 will likely be remembered to mark the turning point where legislative blundering took an otherwise serious financial crisis and molested it into an epic financial collapse.

By fully assuming the liabilities of Fannie Mae and Freddie Mac, the two colossal and corrupt (and conduit of corruptness funneling junk Countrywide Financial loans onto the implied balance sheet of the federal government) government sponsored enterprises, the federal government, led by Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke, has thrust taxpayers into an abyss of insolvency with one mighty shove.

Given the sheer size of these government sponsored companies, with loan guarantee obligations recently estimated by Federal Reserve Bank of St. Louis President William Poole of totaling $4.47 Trillion (That’s TRILLION with a capital T… for perspective ALL U.S. government debt held by the public totals roughly $4.87 Trillion) this legislative reversal making certain the “implied” government guarantee is reckless to say the least.

The following chart (click for larger ultra-dynamic and surf-able chart) shows what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.

It’s important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers.

Finally, the following chart (click for larger ultra-dynamic and surf-able chart) shows the relative movements of Fannie Mae’s credit and non-credit enhanced (insured and non-insured) “Seriously Delinquent” loans.

Question(s) of The Day - Will Government Meddlers Ever Learn?

Isn’t the OCCs findings on the re-default rates the most blatant illustration that all the government meddling is only exacerbating the housing decline?

Will the government ever learn from its mistakes?

Ticking Time Bomb?: Fannie Mae Monthly Summary September 2008

Decades from now the summer of 2008 will likely be remembered to mark the turning point where legislative blundering took an otherwise serious financial crisis and molested it into an epic financial collapse.

By fully assuming the liabilities of Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), the two colossal and corrupt (and conduit of corruptness funneling junk Countrywide Financial loans onto the implied balance sheet of the federal government) government sponsored enterprises, the federal government, led by Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke, has thrust taxpayers into an abyss of insolvency with one mighty shove.

Given the sheer size of these government sponsored companies, with loan guarantee obligations recently estimated by Federal Reserve Bank of St. Louis President William Poole of totaling $4.47 Trillion (That’s TRILLION with a capital T… for perspective ALL U.S. government debt held by the public totals roughly $4.87 Trillion) this legislative reversal making certain the “implied” government guarantee is reckless to say the least.

The following chart (click for larger) shows what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.

It’s important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers and that should they report the delinquent results as a percentage of the unpaid principle balance, things might likely look a lot worse.

Finally, the following chart (click for larger) shows the relative movements of Fannie Mae’s credit and non-credit enhanced (insured and non-insured) “Seriously Delinquent” loans.

The Almost Daily 2¢ - Leaderless Washington

On this momentous day of government bailout, I’d like to take a moment to draw your attention to the complete and total lack of leadership that exists in Washington.

No matter what side of the aisle you identify with or profound respect you might have for our government as an institution, given the current state of economic affairs, it’s easy to recognize that things are not well.

What is leadership anyway?

Is it in knowing how to deftly position oneself within a host of topical issues that, for the most part, are merely the obsession of a polarized fringe of ideological demagogues?

Is it measured by the sum total of your campaign donations?

Does it come as a result of merely performing your civil “service” for multiple decades?

Think for a moment about the significance of the 11th hour phone call made by congress to billionaire investor Warren Buffet on the eve of the first House vote of the massive bailout bill.

Just imagine… The combined knowledge and experience of hundreds of elected officials, in theory representing YOUR knowledge and experience and will, reduced to seeking critical advice on something as fundamental as a nearly one trillion dollar tax-payer funded bailout of Wall Street from a billionaire investor.

Who are they representing?

In our email exchange from last March, Representative Barney Frank said the following:

“I am glad to have your prediction that we will soon be engaged in a "federal bailout of Fannie Mae and Freddie Mac," because I disagree and this will give us some measure of the accuracy of our respective predictions in this regard.” – Rep. Barney Frank

Let me remind you that Rep. Frank is the chairman of the House Financial Services Committee, possibly the most critical legislating committee dedicated to financial affairs of the United States.

Why did he not know?

I’d like to make another appeal that readers, come voting time, remember the feckless and ignorant, jaded, elitist and truly miserable current state of our government and vote against all incumbents.

If you can’t get yourself to vote for a major party you don’t support, consider voting for a third party running for the seat or simply leave that space blank.

Video(s) of The Day - Barney Frank's Junk Assets

Barney Frank joins Charlie Rose to discuss his view of the causes of our current economic crisis and details of the massive Wall Street bailout.

Frank explains that if only the government buys and holds the junk financial assets (mortgage, HELOC, credit card, auto, and education debt securities) the credit markets would flow again and the government would inevitably turn a profit.

Sure good one!

Ticking Time Bomb?: Fannie Mae Monthly Summary July 2008

With the signing of the housing “relief” act, the process has now officially begun in what will be not only the largest taxpayer bailout of private enterprise in history but the largest legislative blunder as well.

Allowing the Treasury Department of an immensely debt-laden country carte-blanche to utilize taxpayer money to engineer an essentially unaudited unwind of the GSEs, the two massive risk-laden failures, seems to smack of the essence of the times and further, at least in my mind, marks a decisive push into the absurd that would likely precede a wider scale collapse of our economic system.

Given the sheer size of these government sponsored companies, with loan guarantee obligations recently estimated by Federal Reserve Bank of St. Louis President William Poole of totaling $4.47 Trillion (That’s TRILLION with a capital T… for perspective ALL U.S. government debt held by the public totals roughly $4.87 Trillion) and the “fuzzy” interpretation of their “implied” overall Federal government guarantee should they experience systemic crisis, these changes are reckless to say the least.

The following chart (click for larger) shows what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.

It’s important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers and that should they report the delinquent results as a percentage of the unpaid principle balance, things would likely look a lot worse.

Finally, the following chart (click for larger) shows the relative movements of Fannie Mae’s credit and non-credit enhanced (insured and non-insured) “Seriously Delinquent” loans.

Collapsedachusetts Existing Home Sales Preview: June 2008

Sources inside the Massachusetts Association of Realtors (MAR) report that next week’s monthly existing home sales results will show that June’s single family home sales dropped a whopping 14.9% on a year-over-year basis while condo sales collapsed a spectacular 20.3% over the same period.

Further, the single family median home value declined 8.0% on a year-over-year basis to $334,900 while condo median prices declined 0.3% to $295,000.

It’s also important to note that the June single family home sales count was the lowest June count on record since 1995 and at 4225 units sold was 30.90% below the record June peak set in June 2005.

The following charts (click for larger) show the decline in single family home sales since 2005.

Notice that June 2008 registered a home sales count well below even the 2007 level as well as indicating that the July’s results will likely be well below 4000 units, a significant decline.


After over two years of declining home sales, weakening home prices and now looming recession it appears that Massachusetts has just entered the price “free-fall” phase of the housing decline where home prices continuously drop even through the spring months which are typically strong in the region.

Stay tuned as next week the S&P/Case-Shiller home price index results will be available for Boston likely showing a continued decline even during the typically strong spring selling season.

The Almost Daily 2¢ - Representative Frank Losing Control

The following clip clearly demonstrates how dysfunctional and truly counterproductive a career politician can become after some 27 long years “service”.

Representative Barney Frank (D-MA) has enjoyed the benefit of an essentially uncontested seat in the House of Representatives for nearly a third of a century begging the question… Is this the best that the 4th District of Massachusetts can do?

During his lengthy rein Rep. Frank has acquired substantial power now lording over one of the most powerful and influential positions as the Chairman of the House Financial Services Committee.

But as I have demonstrated in our exchange recently, he is simply not qualified for the position and as such will almost certainly act as a destructive force pushing our country further into the abyss of insolvency and depression.

People of the country… Can you afford a substantial legislative blunder right now?

People of the 4th district… Do you want to be known as the district that clearly put self interest (i.e. earmarks or simply lackluster civic participation) in front of the public good?

Click to watch the complete Barney Frank clip from News Hour.

An Open Letter To Representative. Frank

Here is the letter I sent last Friday to Representative Barney Frank as a follow-up to our March conversation.

July 11, 2008

Representative Frank,

Last March you and I exchanged several emails the contents of which initially concerned my opposition to the then proposed increase of the government sponsored enterprise (GSE) conforming loan limit but, our dialog inevitably broadened to a more general discussion and disagreement over the soundness of the federal government’s response to the housing-credit debacle, it’s complicit role in the development of this historic crisis and ultimately the final plight of Fannie Mae and Freddie Mac.

Within our exchange you essentially issued a challenge of our respective predictions for the fate of Fannie and Freddie when you wrote the following:

“I am glad to have your prediction that we will soon be engaged in a "federal bailout of Fannie Mae and Freddie Mac," because I disagree and this will give us some measure of the accuracy of our respective predictions in this regard.”

As we now see today, your outlook was seriously flawed.

To be blunt, I believe your inability to see the true nature and severity of the state of this issue not only represents a failure on your part but also truly embodies the extent to which our federal government has mishandled this economic crisis and more generally strayed from the path of prudent, deliberative and sound regulatory and legislative process.

However, I don’t believe your lack of understanding or our government’s overall failure to properly address the economic crisis to date represents a complete failure.

To the contrary, it appears plainly obvious that the worst and most dangerous legislative blundering has yet to come.

Your support of the further expansion of the role of the Federal Housing Administration (FHA) to effect insolvent borrowers, continued insistence that the temporary increase of the GSE conforming loan limits become permanent as well as all other permutations of radical public policy that would seek to bailout debt-laden and bankrupt homeowners (and firms by proxy) by some form of government supported continuation of the injurious effects of the massive housing-credit bubble environment, is more than simply irresponsible.

As chairman of the House Financial Services Committee your lack of a developed depth of knowledge and seemingly blind reliance on the “expert” statements voiced by “leaders” from the housing, mortgage and finance industries during committee meetings and likely during other, more private, conversations and the obvious effects this has had on our public policy is nothing short of disgraceful.

Again, to reiterate a statement I made in our prior conversation, what the American people need now is a legitimate government that will work diligently to restore the credibility, soundness and transparency of our financial markets and our economic system in general.

The Almost Daily 2¢ - Barney Blunders, Fannie Freddie Flounders!

Regular readers may remember that back in March I had an interesting email exchange with Massachusetts Representative and House Financial Services Committee Chairman Barney Frank regarding the legislation allowing the government sponsored enterprises (GSE) Fannie Mae and Freddie Mac to increase substantially their conforming loan limit.

As part of my appeal I protested the increase of the GSE loan limits on the grounds that this form of reliance on these battered “linchpin” enterprises was unsound and would further erode investor confidence in their solvency requiring the federal government to step in and bail them out later this year as outlined in the following excerpt.

“Lastly, what I believe Congress and the President have done by enacting this provision is to introduce a substantial amount of uncertainty into an already wounded and fragile marketplace for agency securities.

Investors in agency securities not only know that the changes that have been enacted are unsound, they are now beginning to recognize the significant credit losses that will inevitably be associated to securities produced under even the prior, more restrictive, regulatory environment.

This recognition of instability has already affected GSE operations resulting in the highest yields on agency securities seen in 22 years thus driving up costs for all home-borrowers.

Although Congressional and Executive mandate apparently provide a dynamic and flexible environment for generating regulatory statute that suits the perceived whim of constituents (particularly in an election year), the “law of unintended consequences” remains largely rigid as it appears now quite clear that the main focus of Congress and the Administration later this year will be the federal bailout of Fannie Mae and Freddie Mac.” - SoldAtTheTop

To this Representative Frank not only took issue, he, in a sense, issued what I took as a challenge of sorts regarding the accuracy of our respective outlooks.

“I am glad to have your prediction that we will soon be engaged in a "federal bailout of Fannie Mae and Freddie Mac," because I disagree and this will give us some measure of the accuracy of our respective predictions in this regard.” – Rep. Barney Frank

Recently, reports have circulated suggesting that Fannie Mae and Freddie Mac are experiencing serious financial stress sending their common stock share prices plummeting and forcing their AAA rated debt to be treated as if it were five steps lower.

Worse yet, today former St. Louis Federal Reserve President William Poole suggested that a federal bailout may be on the way.

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,”

So the question is… why was Representative Barney Frank so horribly wrong and do you think he will admit as much when the time comes?

The Almost Daily 2¢ - Capitol Appeal (A Slight Return… Take 2)

The following is a sequential exchange between Representative Barney Frank (D-MA), Chairman of the House Committee on Financial Services, and yours truly.

For those readers who have already followed along, I have highlighted in bold the initial sentence of the latest exchange so you can simply scroll down and pick up where you left off.

Hopefully this dialog will continue…

===============

January 24, 2008

Representative Frank,

I'm writing to voice my concern over the recently announced homeowner bailout initiative.

Although the cash refunds and other business investment components of the proposal may qualify as a sound fiscal response to the current economic turmoil, the increasing of the GSE conforming loan limits to $730K is a gross misapplication federal regulatory powers and will continue to perpetuate and even exacerbate the unsustainable conditions that have come about in many of our nation's metro housing markets.

It's important to keep in mind that the majority of the housing bubble conditions occurred in metro areas where the now well known era of dangerously lax lending standards resulted in home prices that are completely disconnected from the basic market fundamentals that guided and regulated affordability for many decades as well as a large cohort of homeowners that cannot afford their homes even under the best conditions.

This is NOT a subprime issue. Understand that "prime" Jumbo homeowners are almost as significantly over-leveraged as the now vilified subprime borrower.

By increasing the conforming loan limits so substantially the federal government is merely perpetuating this unsustainable situation and prohibiting the orderly deflating of the nation's home price bubbles.

If this feature of the proposal is allowed to become law it will unquestionably result in continued speculative behavior and inevitably a harder and more substantial housing price crash in the near future.

.

===============

March 5, 2008

We disagree on the question of raising the loan limit for Fannie Mae and Freddie Mac. First, I should note that the loan limit does not go to $730K across the board. In fact, the major problem, in my judgment, intellectually as well as economically with the current limit is that it sets one maximum price for the whole country, when in fact house prices vary greatly geographically. If we have a maximum limit for loans that make sense in Nebraska, it cannot be sensible for parts of California, Massachusetts, Illinois and New York. For Massachusetts, the limit will be $516K- hardly a luxury price in much of Massachusetts. I do agree that we should be welcoming some deflation of house prices, but the pace at which this happens is very important, and having a very rapid decline exacerbated by a freeze in the credit markets for houses in the $400K to $516K range seems to me unwise.

I agree that this is not a subprime issue. But it is an issue that was brought about by the subprime crisis, and by an excessive reaction to it. Your assertion that people who own homes in Eastern Massachusetts that are worth between $417K and $516K are as over-leveraged as subprime borrowers is not accurate according to any of the data I've seen.

BARNEY FRANK

===============

March 11, 2008

Representative Frank,

Thank you for responding to my initial protest of the Government Sponsored Enterprise (GSE) conforming loan limit increase provision of the recently enacted economic stimulus package but I would like to respectfully challenge some elements of your response.

First, although under prior regulation the Office of Federal Housing Enterprise Oversight (OFHEO) set $417,000 as the maximum sized loan a GSE could purchase for a single family home located in all states and regions except Alaska, Hawaii, Guam and the U.S. Virgin Islands, your assertion that a single limit poses a regulatory dilemma for the nation’s diverse housing markets is incorrect.

It’s important to remember that this limit was intended not to satisfy a sense of fairness for participants in any particular local housing market but rather to ensure the security of the GSEs and prevent unsafe and unsound practices that would run contrary to their statutory charters.

In states and regions where the prior limit of $417,000 was far greater than the typical median single family home price (i.e. Nebraska in your example) homes would still have to meet basic appraisal and other loan qualifying guidelines (also set out by existing statute) thus prohibiting the wholesale distribution of the maximum principal amount.

In states and regions where the prior limit was less than the typical median home price, the $417,000 combined with a healthy 20% down-payment provided for a significant $520,000 home purchase and homebuyers who needed more would be expected to be of the means not requiring affordable housing assistance.

Keep in mind that, as a basic guide, only 12 of the 145 metro area home markets tracked by the National Association of Realtors (NAR) has EVER recorded median home values in excess of $417,000.

Next, it’s important to consider that under the strict interpretation of prior regulatory guidelines the conforming loan limit should have, in fact, decreased for 2007 and again for 2008 as the Federal Housing Finance Boards (FHFB) national average house price declined on a year-over-year basis for both preceding October results.

In the face of the national price declines though, OFHEO took it upon itself to devise a new and substantially more complex strategy for determining the conforming loan limit that sought to mitigate any potential market instability that could arise from an abrupt decrease.

But even under the new guidelines the limit IS scheduled to decrease for 2009 and in all likelihood will continue to require a downward adjustment as the FHABs October average home price continues to decline.

How does Congress intend on accounting for this phenomenon?

Aside from the folly of maintaining a regulatory guideline that only gets amended up and never down, Congress has created a scenario whereby 125% of a greatly decreased median home price may in fact soon be materially LESS than the original $417,000.

Lastly, what I believe Congress and the President have done by enacting this provision is to introduce a substantial amount of uncertainty into an already wounded and fragile marketplace for agency securities.

Investors in agency securities not only know that the changes that have been enacted are unsound, they are now beginning to recognize the significant credit losses that will inevitably be associated to securities produced under even the prior, more restrictive, regulatory environment.

This recognition of instability has already affected GSE operations resulting in the highest yields on agency securities seen in 22 years thus driving up costs for all home-borrowers.

Although Congressional and Executive mandate apparently provide a dynamic and flexible environment for generating regulatory statute that suits the perceived whim of constituents (particularly in an election year), the “law of unintended consequences” remains largely rigid as it appears now quite clear that the main focus of Congress and the Administration later this year will be the federal bailout of Fannie Mae and Freddie Mac.

.

P.S. As for $417,000 to $516,000 being suitable for eastern Massachusetts remember that the conforming loan limit was $300,700 in 2000 and $359,650 in 2005 and that GSE loans combined with “piggyback” second liens provided plenty of stimulus for our local market bubble.

Massachusetts is not immune and in fact will undergo substantial socio-economic stress in the coming years as home prices don’t deflate slowly as you suggest but in fact continue to re-price sharply downward.

===============

March 11, 2008

Our biggest difference of opinion is your assumption that raising the limit will expose Fannie Mae and Freddie Mac to greater danger. I think the opposite is the case. I think that their ability to participate at the higher levels will add to their financial security.

With regard to the FHA, the Congressional Budget Office gives us a positive score with a comparable increase in the limit - that is they find that these loans will be repaid at an even higher rate than the other loans that fall below the old limit. And Secretary Paulson was reluctant to allow Fannie and Freddie to keep any of the new loans in their portfolio because he said they would be so profitable that they would want to keep them. As to your assertion that this has produced more uncertainty, the response we have gotten has generally been a positive one from people concerned with housing finance. As to "significant credit losses," you say that they were "associated to securities produced" under the prior environment period. Again, our central difference is your apparent view that increasing the limit will exacerbate this. I think if anything it will have the opposite effect.

I am glad to have your prediction that we will soon be engaged in a "federal bailout of Fannie Mae and Freddie Mac," because I disagree and this will give us some measure of the accuracy of our respective predictions in this regard.

BARNEY FRANK

===============

March 13, 2008

Representative Frank,

Again, thanks for your continued dialog…

I’d like to point out that although my “prediction” of a looming federal bailout of Fannie Mae and Freddie Mac may seem dire, it is in no way based solely on conjecture.

In fact, with the Federal Reserve’s recent announcement of the creation of the Term Securities Lending Facility (TSLF), the initial stages of a bailout have, in a sense, already been set.

The TSLF has been designed specifically as an attempt to break the “logjam” in the residential mortgage backed securities (MBS) market particularly for agency securities which account for roughly 70% of all “stuck” MBS by value.

But this action, although providing the kernel of the concept of “bailout” for the GSEs and their associated securities, likely comes too late to help credit markets that are now experiencing unprecedented stress with firms like Carlyle Capital Corp., unable to refinance its residential MBS, now defaulting on multiples of billions of dollars of debt and, as recently as today, desperately attempting to invoke the more substantial bailout of the “implied guarantee” from the U.S. government.

So, why have these mortgage backed bonds become so illiquid leaving the 20 primary dealers (including Goldman Sachs and Merrill Lynch) unable to sell them to investors and likely thousands of investors unable to rid or refinance them as had been so effortlessly accomplished in the past?

There are two main problems that are working to seriously erode investor confidence and both appear to me to be, unfortunately, not very easily solved.

First, steadily falling home prices are driving a surge in the rate of delinquency and foreclosure of agency mortgages.

This should come as no surprise as Countrywide Financial has been and continues to be Fannie Mae’s largest lender customer and servicer responsible for 28% (up from 26% in FY 2006) of Fannies credit book of business.

In fact, there is a fairly strong correlation between Countrywide’s foreclosure rate per total number of loans and Fannie Mae’s “seriously delinquent” rate (which includes both serious delinquencies and foreclosures) per total number of loans both climbing to roughly 1% as publicized in their most recent respective monthly operational reports.

Countrywide is clearly leading the trend by about two months for foreclosures and with over 7% of its loans now delinquent, the future does not appear very bright.

As we will continue to see in the coming months, the relationship between Fannie Mae and Countrywide defaults is not at all incidental and in the path that Countrywide plows, Fannie will surely follow.

The second and arguably more important problem though has to do with our government’s response to this unprecedented crisis.

I think it’s safe to conclude that one of the more dangerous heights reached during the crescendo of this historic asset-credit bubble is that of our government’s (particularly the federal government’s) eager and acquiescent collaboration with private sector.

How did this brewing debacle, that was so obvious to many including several notable and vocal economists, elude regulatory oversight for so long as to now pose easily the most sever systemic risk to our economy since the Great Depression?

More importantly at this point though, why is the government choosing to bluff its way through the decline, propping up triple-A rated entities that we all know are not worthy, creating super-SIVs and other structures for hiding the severe losses of private financial institutions, slashing the fed funds rate in a series of unprecedented moves directly correlated to Wall Street carping, and passing new legislation that seeks to place additional pressure on battered “linchpin” government entities while simply repeating the same mistaken financial engineering that got us here in the first place?

As the primarily foreign investors who would be buying our agency bonds are watching this debacle unfold, I believe they are rightfully concluding that we have fumbled badly, taking a path that, in many ways, is startlingly similar to the one that Japan took when it grossly mishandled the deflation of its massive asset bubble.

They are shying away from subsidizing our mortgage debt and who could blame them.

As for your representation of what Secretary Paulson believes would be profitable or the response you have gotten from “people concerned with housing finance” I can only say that your posture isn’t consistent with what I would expect from an official that essentially holds a position of regulatory oversight over our financial institutions.

I’m sure Secretary Paulson knows a thing or two about profit and the Mortgage Bankers Association and National Association of Realtors can spin a terrific yarn about the benefits of certain government intervention but what the American people need now is a legitimate government that will work diligently to restore the credibility, soundness and transparency of our financial markets and our economic system in general.

.

===============

The Almost Daily 2¢ - Capitol Appeal (A Slight Return)

The following is a sequential exchange between Representative Barney Frank (D-MA), Chairman of the House Committee on Financial Services, and yours truly.

Hopefully the dialog will continue…

>>

January 24, 2008

Representative Frank,

I'm writing to voice my concern over the recently announced homeowner bailout initiative.

Although the cash refunds and other business investment components of the proposal may qualify as a sound fiscal response to the current economic turmoil, the increasing of the GSE conforming loan limits to $730K is a gross misapplication federal regulatory powers and will continue to perpetuate and even exacerbate the unsustainable conditions that have come about in many of our nation's metro housing markets.

It's important to keep in mind that the majority of the housing bubble conditions occurred in metro areas where the now well known era of dangerously lax lending standards resulted in home prices that are completely disconnected from the basic market fundamentals that guided and regulated affordability for many decades as well as a large cohort of homeowners that cannot afford their homes even under the best conditions.

This is NOT a subprime issue. Understand that "prime" Jumbo homeowners are almost as significantly over-leveraged as the now vilified subprime borrower.

By increasing the conforming loan limits so substantially the federal government is merely perpetuating this unsustainable situation and prohibiting the orderly deflating of the nation's home price bubbles.

If this feature of the proposal is allowed to become law it will unquestionably result in continued speculative behavior and inevitably a harder and more substantial housing price crash in the near future.

.

<<

March 5, 2008

We disagree on the question of raising the loan limit for Fannie Mae and Freddie Mac. First, I should note that the loan limit does not go to $730K across the board. In fact, the major problem, in my judgment, intellectually as well as economically with the current limit is that it sets one maximum price for the whole country, when in fact house prices vary greatly geographically. If we have a maximum limit for loans that make sense in Nebraska, it cannot be sensible for parts of California, Massachusetts, Illinois and New York. For Massachusetts, the limit will be $516K- hardly a luxury price in much of Massachusetts. I do agree that we should be welcoming some deflation of house prices, but the pace at which this happens is very important, and having a very rapid decline exacerbated by a freeze in the credit markets for houses in the $400K to $516K range seems to me unwise.

I agree that this is not a subprime issue. But it is an issue that was brought about by the subprime crisis, and by an excessive reaction to it. Your assertion that people who own homes in Eastern Massachusetts that are worth between $417K and $516K are as over-leveraged as subprime borrowers is not accurate according to any of the data I've seen.

BARNEY FRANK

>>

March 11, 2008

Representative Frank,

Thank you for responding to my initial protest of the Government Sponsored Enterprise (GSE) conforming loan limit increase provision of the recently enacted economic stimulus package but I would like to respectfully challenge some elements of your response.

First, although under prior regulation the Office of Federal Housing Enterprise Oversight (OFHEO) set $417,000 as the maximum sized loan a GSE could purchase for a single family home located in all states and regions except Alaska, Hawaii, Guam and the U.S. Virgin Islands, your assertion that a single limit poses a regulatory dilemma for the nation’s diverse housing markets is incorrect.

It’s important to remember that this limit was intended not to satisfy a sense of fairness for participants in any particular local housing market but rather to ensure the security of the GSEs and prevent unsafe and unsound practices that would run contrary to their statutory charters.

In states and regions where the prior limit of $417,000 was far greater than the typical median single family home price (i.e. Nebraska in your example) homes would still have to meet basic appraisal and other loan qualifying guidelines (also set out by existing statute) thus prohibiting the wholesale distribution of the maximum principal amount.

In states and regions where the prior limit was less than the typical median home price, the $417,000 combined with a healthy 20% down-payment provided for a significant $520,000 home purchase and homebuyers who needed more would be expected to be of the means not requiring affordable housing assistance.

Keep in mind that, as a basic guide, only 12 of the 145 metro area home markets tracked by the National Association of Realtors (NAR) has EVER recorded median home values in excess of $417,000.

Next, it’s important to consider that under the strict interpretation of prior regulatory guidelines the conforming loan limit should have, in fact, decreased for 2007 and again for 2008 as the Federal Housing Finance Boards (FHFB) national average house price declined on a year-over-year basis for both preceding October results.

In the face of the national price declines though, OFHEO took it upon itself to devise a new and substantially more complex strategy for determining the conforming loan limit that sought to mitigate any potential market instability that could arise from an abrupt decrease.

But even under the new guidelines the limit IS scheduled to decrease for 2009 and in all likelihood will continue to require a downward adjustment as the FHABs October average home price continues to decline.

How does Congress intend on accounting for this phenomenon?

Aside from the folly of maintaining a regulatory guideline that only gets amended up and never down, Congress has created a scenario whereby 125% of a greatly decreased median home price may in fact soon be materially LESS than the original $417,000.

Lastly, what I believe Congress and the President have done by enacting this provision is to introduce a substantial amount of uncertainty into an already wounded and fragile marketplace for agency securities.

Investors in agency securities not only know that the changes that have been enacted are unsound, they are now beginning to recognize the significant credit losses that will inevitably be associated to securities produced under even the prior, more restrictive, regulatory environment.

This recognition of instability has already affected GSE operations resulting in the highest yields on agency securities seen in 22 years thus driving up costs for all home-borrowers.

Although Congressional and Executive mandate apparently provide a dynamic and flexible environment for generating regulatory statute that suits the perceived whim of constituents (particularly in an election year), the “law of unintended consequences” remains largely rigid as it appears now quite clear that the main focus of Congress and the Administration later this year will be the federal bailout of Fannie Mae and Freddie Mac.

.

P.S. As for $417,000 to $516,000 being suitable for eastern Massachusetts remember that the conforming loan limit was $300,700 in 2000 and $359,650 in 2005 and that GSE loans combined with “piggyback” second liens provided plenty of stimulus for our local market bubble.

Massachusetts is not immune and in fact will undergo substantial socio-economic stress in the coming years as home prices don’t deflate slowly as you suggest but in fact continue to re-price sharply downward.

<<

The Almost Daily 2¢ - Jumbo Lives (A.K.A Realtor’s Win)

So… it looks like that’s it.

Washington pulled the trigger on what they term a bipartisan “middle class” initiative to “respond to the economic pressures affecting the American people” by “putting money in the hands of working families”.

Undoubtedly, the most significant element of the proposal is NOT the cash handouts or adjustments to depreciating business investment but is instead the increasing of the GSE conforming loan limit to $730K.

After the passage of this initiative the various federal “affordable housing” programs will NO LONGER BE WORKING TO ASSIST LOWER AND MIDDLE CLASS FAMILIES afford housing as first time home buyers (as they were all intended to do) but instead will be working to enable and subsidize truly affluent homeowners and housing speculators.

This has to be easily the most warped and grotesque and truly unfair socialization of private financial losses on record.

Realtors, Homebuilders, Mortgage brokers, Flippers and other Speculators, DINK Yuppies, regular Yuppies, HGTV, the most affluent 1%, hedge funds, Countrywide Financial, Bear Sterns… greed itself has just been bailed out on the backs of the middle class.

Hey Red states!... You are now subsidizing the Blue states and enabling their most affluent and highly educated residents to continue a lifestyle of unspeakable (and unsustainable) excess.

So it looks like all the Realtor RPAC (the largest and most affluent and influential PAC our country has ever known) money paid off!!!!

If you are as outraged as I am over this….

LET THE FOLLOWING RESPONSIBLE PARTIES KNOW! THIS IS YOUR LAST CHANCE...

• The White House
• Massachusetts Representative Barney Frank at (202) 225-5931
• New York Senator Charles Schumer
• California Representative Nancy Pelosi

The Daily 2¢ - Mortgage Tsar?

In terms of government response to crisis, you know things are really going haywire when they anoint a new Tsar.

And so it goes for the housing-mortgage meltdown.

Not satisfied with intervening in the “free” market through mere Fed rate cuts and a potentially (in the bag) dramatic expansion of Freddie Fannie and FHA, Congress seems so bent on attempting to prevent a correction in the nation’s housing markets that they are now proposing the “temporary” creation of the position of “Mortgage Tsar”.

Furthermore, Representative Barney Frank (D-MA), Chairman of the House Financial Services Committee, offered up his pick for the spot, former Congressman Jack Kemp.

I think, at this point, it’s safe to say that Congress is getting a little carried away.

Senator Christopher Dodd (D-CT) even suggested that the current circumstances in the housing-mortgage market are akin to a “slow-motion, 50-state Katrina, taking people's homes one-by-one, deva­stating their lives and destroying their communities.”

So, what are the expectations for a “Mortgage Tsar” anyway?

Here is a possible “Mortgage Tsar” credo:

“Willing to combat foreclosure wherever it should strike the innocent and further to prevent the unwitting debt getter from making bad decisions. Stops at nothing to eliminate pre-payment penalties… Able to make a large Jumbo loan conform in a single bound!... look up in the air… it’s a bird… it’s a plane… it’s… it’s… The Mortgage Tsar!”

Congress… Put your hands down and slowly back away from the legislation.

The Daily 2¢ - Jackson’s Yuppies

The Bush administration has got to get its story straight.

On several occasions now, including as recently as last Thursday’s hearing in front of the House Financial Services Committee, Housing and Urban Development Secretary Alfonso Jackson has explicitly stated that administration policy is not intended to help so called “Yuppies”.

Yet, with their now uniform acceptance of the “temporary” conforming loan limit increase, that’s exactly Senator Schumer, Representative Frank and a reluctant Bernanke, Paulson and Jackson seem bent on doing.

In an interview with Bloomberg last July, Secretary Jackson initially made his anti-yuppie bailout position.

“We have very educated people that decided that they wanted to live above their means, and we call them yuppies… young people who wanted a Mercedes Benz but at the same time wanted a $600,000 home. So, they go in and make a loan that is basically interest only wake up the next morning and they can’t cover the note because the house has not increased [in value]… In those cases, we are not willing to bail those people out. But low and moderate income people, fireman and police who didn’t read the fine print, we will be able to help them stay in their home.”

Again, during the press conference preceding the “bailout” conference with all the national homebuilders that occurred earlier this month, Jackson reiterated his anti-yuppie stance.

“… this is a limited market we are trying to save. We’re not here to save those persons who made those huge exotic loans, which I call yuppies, We’re here to look at middleclass Americans.”

Then again, at last week’s committee hearing, Jackson stated that yuppies were not on the list to be saved.

“Let me say this to you mister chairman, clearly there are some people that we are not going to be able to help. Especially, as I always say, the yuppies who had this extravagant decision to have two or three cars, and a huge house they can’t afford but the people we are looking at are basically middle income people, fireman… police, teachers, nurses.”

So, I would think the point has been made very clearly… No Yuppie Bailout!

Yet, with the proposed conforming loan limit increase to $625,000 for the more expensive “urban” areas, it’s obvious that, by its definition, the yuppie and his or her lender is being bailed out.

Who else lives in the expensive metro markets and borrows $625,000 toward their home purchase anyway… fireman, police and nurses?

It’s important to keep in mind that the main proponents of the conforming loan limit increase are Senator Charles Schumer (D-NY) and Representative Barney Frank (D-MA), both of whom receive the overwhelming majority of their campaign contributions from the real estate and financial service sectors (hat tip Frothy).

It seems obvious that, in the name of helping the common American, and even with numerous public statements to the contrary, the government will plow ahead and bailout Wall Street.

One good turn deserves another as they say!

The Daily 2¢ - The End of All Times?

A reader recently commented that by advocating the position of allowing the housing markets to play themselves out unfettered from government intervention, I was taking a “black and white” view of “free markets” and essentially supporting a financial seizure.

Furthermore, the commenter pointed to the bank run in the UK and further suggested that inaction would lead to a violent downward spiral inevitably resulting in a titanic market crash, worthless currency, bread lines, the breakdown of civility and finally chaos in the streets.

Although I do have a fondness for the taste of human flesh, I’d like to challenge this contention ever so slightly.

First, I think favoring government intervention in the unwinding of the national housing bubbles is actually the more “black and white” perspective as it assumes a measure of certainty about the legitimacy of the action, its effectiveness and more importantly that, through its implementation, greater harm is not being done.

We have to first accept that the housing-lending boom has significantly overpriced residential housing, particularly in the metro areas, and that this mispricing will correct one way or the other.

You don’t have to take my word for it, every conceivable measure of sales, values, mortgage equity withdrawal, homeownership rates, second home ownership rates, homebuilder sentiment, construction activity, realtor membership, and finally a host of popular culture phenomena like “flipping” television entertainment supports the notion that we have just experienced an anomaly of epic proportions.

The correction is upon us but our economy, I believe, is large enough and dynamic enough to resolve the correction without causing actual Armageddon.

By taking intrusive actions, such as allowing Fannie and Freddie to become Jumbo loan lenders, the government would essentially be attempting to fill the vacuum vacated by astute market participants, in an effort to help blunt some of the downside.

But mightn’t those participants vacated for a reason?

Is it sensible for the government to attempt to resume orderly operations of an aspect of a market that the market itself has deemed too risky?

Furthermore, while I do think we are headed for a hard recession as a result of the unwinding of the housing-lending debacle, I can’t imagine that it is constructive to dwell on the worst possible outcome when weighing the costs and benefits of government actions.

Could the coming recession run deep and be widely felt with significant shakeout of sentiment and pullback in consumption?

I think so… But food lines and chaos in the streets? Probably not.

The Daily 2¢ - Federal Nonconformists

I can't think of a more preposterous and irrational example of exuberant upside bias on the part of the Federal government then that of the recent toiling over the OFHEO conforming loan limit.

For those of you that are not yet familiar, the Office of Federal Housing Oversight (OFHEO) is the government agency that is responsible for regulating the two primary Government Sponsored Enterprise (GSE) mortgage giants, Fannie Mae and Freddie Mac.

One of the main, if not THE main, role of OFHEO is to set the “conforming loan limit”, a maximum loan value that is used to act as the threshold between a “safe” loan that Freddie Mac and Fannie Mae are allowed to purchase and an “unsafe and unsound” loan “running contrary to statute”.

This is how the “conforming” vs. “Jumbo” loan is defined… below the limit is “conforming” above is non-agency “Jumbo”.

Currently, the limit for a single family home is $417,000, pretty frothy when you consider that, only as far back as 2000, the limit stood at $252,700.

Keep in mind that this means that an average home buyer can go to a mortgage broker, bank or other lender and borrow as much as $417,000 of home loan principle and still remain eligible for GSE underwriting that carries a lower rate of interest since GSE loans are assumed to be backed by the full faith and credit of the federal government (this assumption is really a bit of a myth… but that’s a post for another day when things really start to quake!).

So how is it, you ask, that the limit nearly doubled in roughly 5 years (keep in mind, it was set to $417,000 in November 2005)?

Easy, when the home prices went up, they simply raised the value (for more detailed information on how they change the limit, see my prior post on the subject).

But now comes the sticky part… now that home prices are going down, what are they doing to the limit?

The answer is surprise… OFHEO is coming up with all sorts of oddball ways of keeping from having to lower the limit (see my past two posts on the subject)

In fact, in 2006 when home prices declined which, according to their prior inflating methodology, should have resulted in a reduction of the conforming loan limit, OFHEO revised their guidelines and left the limit unchanged.

Now in 2007, home prices are going to fall again, only this time by a likely far more significant percentage and what has OFHEO done in response?

They have revised the guidelines once again, effectively postponing any decrease until certain conditions are met (again, see my prior post on the subject).

After soliciting public comment in June and July about the proposed changes to the guidelines, OFHEO received a number of respondents, particularly the National Association of Realtors (NAR), the National Association of Home Builders (NAHB) and the Mortgage Bankers Association (MBA) as well as Fannie Mae, Freddie Mac and a whole raft of two-bit mortgage lenders who expressed clear opposition to the changes NOT because they would leave the limit unchanged BUT because they feel OFHEO should NEVER LOWER THE LIMIT!

ONLY UP... NEVER DOWN!

If that weren’t outrageous enough, there has been much talk for the last few days coming from Congressional figures such as Representative Barney Frank (D-MA), the Chairman of the House Financial Services Committee, who actually prefers that the limit be INCREASED, even in the face of two years falling home prices!

The point of this, obviously, would be simply to force Fannie and Freddie to effectively “re-liquefy” the now totally stalled Jumbo market.

Apparently though, both Treasury Secretary Paulson, and Senate Banking Chairman Dodd (D-CT) have expressed that it will take specific legislative action in order to allow OFHEO to raise the conforming limit above the current level.

Now, I’m not very sure why they have concluded this as OFHEO just modified its procedures for lowering the value without any legislative debate whatsoever, but it really makes no difference.

If you listen closely to Dodd, Frank and Paulson, they are all saying the same thing namely it will take legislative action and the legislation is on the way.

This is one of the most egregious examples of a dimwitted Congressional-Federal assault on the “free” markets I have ever seen.

They, in the supposed well meaning attempt to help “average” Americans, are essentially attempting to control the market price of residential real estate.

Don’t underestimate the severity of this fumbling.

To put it in better perspective, it has recently been estimated (in Dean Bakers latest excellent paper... hat-tip HousingPanic) that there is anywhere between $4 to $8 TRILLION of housing equity that will be lost in the process of deflating (re-pricing) the housing bubble, bringing prices back to hundred year historical averages.

That’s nearly 2 – 4 times larger than the entire 2008 Fiscal Year Federal Budget.

This means the by finagling with things like the conforming loan limit, mortgage bailout funds and foreclosure timeouts, the Federal government is attempting to use both taxpayer dollars and the full faith and credit of our government in order to maintain absurdly inflated housing values and the artificial wealth this boom created.

This would clearly create a moral hazard of unparalleled proportions.

Remember, Jumbo loans were most frequently used by upper middle class affluent home buyers, and for the ones that are now in trouble, the ride down will be painful.

But that is the price you pay for taking a risk in a “free” market.
And who better to take this hit than Americans with generally good incomes and employment opportunities.

If the government is smart it will allow this natural correction to take place unfettered, permitting scores of Americans to learn a valuable life lesson.

BNN MUST SEE TV! – Countrywide Layoffs, GreenPoint Mortgage Folds, GMAC Slimed, Senator Dodd, Rep. Barney Frank and Nouriel Roubini

Things are really heating up for the credit-mortgage crunch.

We now have the news of a significant new wave of layoffs, closings and distress with Countrywide Financial (NYSE:CFC) cutting considerable staff, Capitol One’s (NYSE:COF) residential mortgage subsidiary GreepPoint Mortgage closing its doors, and GMAC’s residential mortgage unit ResCap Holdings suffering with its loss of non-conforming loan production.

Watch Countrywide Cut on BNN!

Watch GreenPoint Flop on BNN!

Watch GMAC get Squeezed on BNN!

To add a further complexity, Congress is now stepping up its actions, announcing a previously unscheduled meeting today between current presidential candidate and Senate Banking Committee Chairman Senator Dodd (D-CT) and Ben Bernanke as well as a seeing a significant new round of regulatory rumblings from House Financial Services Committee Chairman Representative Barney Frank (D-MA).

Watch Dodd Preach on BNN!

Watch Frank Regulate on BNN!

Finally, as Nouriel Roubini sees it, the Feds latest strategy has not worked, panic is continuing to spread as indicated by the by the latest US Treasury yields, and that the Fed is likely to cut rates 25 basis points in September and possibly could have an emergency cut even earlier.

Watch Roubini Be Right Again and Again on BNN!